Thursday, December 18, 2008

The Minimum Pricing Debate

The weak economy, as I mentioned in my last post, is encouraging cutthroat pricing wars between retailers trying to make the most of this slow year. However, manufacturers are hurting as well and trying to protect themselves with minimum pricing agreements.

This issue is currently gaining a lot of attention. As pricers we can see all sides of the issue, especially as most of these debates are centering mostly on commodity products rather that high value offerings.

As a pricer, where do you stand on the issue? How is this debate affecting your current pricing operations? More to come - Warmly, EM

The Wall Street Journal Reports:
"WASHINGTON -- Hoping to roll back a Supreme Court decision that allows manufacturers to set minimum prices on products, opponents launched a campaign that will include use of eBay Inc.'s popular Web site to garner consumer support.

At a closed-door meeting whose attendees included representatives of auctioneer eBay and discount retailer Costco Wholesale Corp., opponents decided to lobby for a bill now pending in Congress that would make minimum-pricing agreements a violation of antitrust law."

"Discounting, of course, remains a fixture on the retail landscape -- particularly in this year's holiday shopping season, due to the weak economy. MAP agreements don't cover all products and sometimes manufacturers grant exceptions. Typically the agreements apply to high-end goods, electronics and new product lines that manufacturers don't want to see tarnished by immediate discounting."

"Minimum-Price Foes to Use eBay in Effort"
"Manufacturers have been racing to enforce minimum-pricing policies since last year, when the Supreme Court ruled them to be legal, and not a violation of antitrust law. EBay and a group of other retailers and antitrust advocates are meeting Thursday in Washington to craft a strategy to overturn that ruling.

Manufacturers say minimum-pricing requirements are good because they protect a brand's image from being tarnished by discounting, while helping retailers make enough profit to pay for customer service. Consumer advocates argue that minimum-pricing deals hurt shoppers by keeping prices high and diminishing consumer choice."

"Discounters, Monitors Face Battle on Minimum Pricing"

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More Online Pricing Wars: Black Friday and Automobiles

With the economy uncertain, consumers have been increasingly less likely to spend money as freely as in recent past. This is a problem for retailers who depend on these six weeks to fix their profits for the rest of the year. Retailers are vying for the business of a shrinking consumer pool with shrinking funds, and the competition is as fierce online as in brick and mortar stores (where a Wal Mart employee was trampled to death the day after Thanksgiving by eager shoppers looking for the cheapest prices on high demand electronics):
"According to CNBC, Amazon's strategy is to use very low prices as a way of stopping competitors like eBay (NASDAQ: EBAY) dead in their electronic tracks. This Christmas season, retailers, whether online or not, may find themselves in a no-win situation. They have to lower prices to encourage people to shop. But quality growth in top-line sales is questionable. When managements see the bad news flow about the global recession, they become scared and want to become even more aggressive in terms of pricing. The strategy may work and it may not. It's a vicious circle."

"Will Amazon win with its pricing strategy?"

In the vein of PriceSpider, a new website just launched which aggregates car prices around the country and helps consumers find the best deal:
"The founder of, a website that searches for the best car prices, says he can help the ailing auto industry by pointing his customers toward the lowest-price deals. has amassed a database of 9,000 dealers nationwide that offer no-haggle pricing. The site uses the data to tell users what they should expect to pay for cars. When a user enters a make and model, Autobrag lists the no-haggle price and dealers offering the model within a certain radius of their zip code.

The service, launched in March 2006 with 140 dealers, now attracts 12,000 unique visitors a month, says CEO Danny Chan. And starting this week, Autobrag users can make bids on the cars through a new service, "The Braggler."

"Car Pricing Web Site Trying to Find Road to Profits"

Any retail pricers out there employing creative pricing strategies in this crucial time of year? Share your thoughts and experiences! Warmly, EM

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NFL Follows Airline Pricing Examples

The San Francisco Giants will be the first NFL team to employ "dynamic pricing" strategies to increase ticket sales in this down economy. Prices on a certain number of tickets will rise and fall each week based on demand.

The team will employ a pricing software to determine prices right up to the day before the game. See the following articles:
"The San Francisco Giants are taking a page from the airline industry and the theater. This spring, they will be come the first ball club in the country to offer a limited number of tickets with prices based on demand. It's called "dynamic pricing".

With the help of new software, the Giants will become the first team in the nation able to adjust ticket prices for a limited number of seats for walk up sales. Giants' President, Larry Baer, says this could be just the deal you're looking for if you want to see a ball game, but find your funds limited."

"Giants to Try Out Dynamic Pricing"

"Having the ability to adjust prices like airlines do can be an important tool for us in the long run," said Staci Slaughter, the team's senior vice president of communications.

"Alas, the helter-skelter nature of airline-ticket pricing often infuriates customers, as people in adjoining seats might pay vastly different sums for the same flight. The Giants recognize that, which is why the 2009 experiment will cover a small portion of seats in the vast reaches of the upper deck and the back of the bleachers that largely go unsold."

"Giants expand variable pricing: Goal is to capitalize on demand"

How will this plan work out? Will the team be successful in capturing customers who would otherwise be less likely to attend in the current economy? Will the NFL have a better time with customer reactions than the airline industry?

Add your thoughts! Warmly, EM

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Monday, December 15, 2008

Pilgrim’s Pride in Bankruptcy …. Amazingly “Bo” Pilgrim Still Doesn’t Get Pricing

Thanks to our contributing pricing expert, Tim Smith, PhD, for this enlightening guest post.

Cost of chicken feed is up, but the price of chicken is flat to down. What went wrong? Marshall's scissors alone would predict the current profit failures in chicken production.

Though branding and quality issues can provide price differentiation within the chicken market, the core price level of chicken is set by the willingness of producers to supply and consumers to buy. At some level, chicken is a commodity. Even where it is not, the price differential of "good" chicken to "acceptable" chicken may increase the price of the "good" chicken over "acceptable" chicken, but its total price of "good" chicken is dependent on the price of the "acceptable" chicken. The basic value approach to pricing dictates: the price of "good" chicken = price of "acceptable" chicken + price differential. Thus, if you increase supply of "acceptable" chicken while demand is flat, the market clearing price of most all chicken will go down.

Lower prices of chicken may not be all bad if the producers have sufficient economies of scale that increase with increasing production faster than prices fall with increases in supply, but such economies aren't sufficient for chicken producers today. Today, the cost of producing chickens is going up. Roughly two-thirds the price of chicken is derived from the cost of chicken feed, and during the past two years chicken feed went up from $2.40 a bushel to $7 a bushel before recently declining to a more modest level near $4 a bushel.

When marginal costs go up, prices need to increase. With increasing prices, supply will need to decrease. Simple application of Marshall's scissors.

But, instead of cutting back production, in all of Lonnie "Bo" Pilgrim's wisdom, he has decided to use the bankruptcy protection to maintain production. He seems to have an unbounded faith that somehow demand will increase and he will make a profit. He may have faith, but I will trust the science of economics – which predicts the market clearing price of chicken will continue to remain below marginal costs to produce until supply adjust appropriately to market demand. Thus, for now, Bo Pilgrim is "strategically" destroying profits.

Let's hope his bankers ask this octogenarian to step aside for someone who is using his brain intelligence rather than his faith intelligence. In the meantime, I feel bad for Tyson Foods, a competing chicken producer, as they have to deal with a nasty industry wide challenge. As is true for other industries, pricing power is subject to the actions of the stupidest competitor.

Tim Smith, PhD is an Adjunct Professor teaching Pricing at DePaul University and Managing Principal of Wiglaf Pricing.

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Tuesday, December 9, 2008

How is today’s economy impacting company pricing plans?

How is today’s economy impacting company pricing plans?

Your pricing department activity and staffing issues?

Well the Macro-economic news is overwhelming. Good time to connect with you and about your micro-economic issues of the day.

To what extent is your company responding to downward price pressures? How much more or less is the company turning to your department for price and profit help?

Perhaps your company is the exception and plans to thrive with pricing in 2009.
Look at McDonald’s who just reported an 8% sales increases, despite huge currency impacts. They credit lower pricing, more frequent promotions and a healthier menu to their success.
For example --my McDonalds now offers free coffee every workday morning ; so guess who switched out of Starbucks for Mickey D? ( right me!-and “I’m lovin it”)

Please Share with the pricers what seems to be working / or not in your pricing world. Eric Mitchell Founder PPS

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Tuesday, December 2, 2008

SaaS Pricing Model Expands as Economy Tightens

As more and more businesses are tightening their belts and preparing for more economic uncertainty in the near future, software providers are increasingly moving to provide SaaS (software as a service) solutions and pricing models. Fewer companies are budgeting for the capital expenditures needed for enterprise system purchases or upgrades, and are instead opting for Web-based platforms that are easy to integrate and don't require the purchase of additional hardware.

Another recent SaaS pricing model announcement:
Sunrise Software, a leading independent provider of IT Service Management software, today announced a new subscription pricing model designed to help organisations budget for ITIL in a tougher economic climate. The offering combines the benefits of on-premise, hosted software and Software as a Service (SaaS) models for Sunrise's range of IT Service Management (ITSM) and ITIL software solutions. The introduction of Sunrise Software's subscription pricing model means that although customers will rent the appropriate software, it will remain hosted and maintained at the customer site.

Under the terms of Sunrise Software's new subscription pricing model, customers can benefit from the lower capital expenditure of a SaaS model, but still enjoy the complete control and configurability of an on-premise model. There is just one upfront payment for project and training costs, followed by an annual subscription to the software.

Tom Weston, Chairman of Sunrise Software, commented: "We believe this new pricing model represents a particularly attractive package for those organisations under pressure to improve their IT cost/performance ratio. With the new subscription model, it is now even easier for potential customers to reap the rewards of ITIL, without having to compromise on functionality and flexibility to meet stringent cost requirements."

Read the full story: "Sunrise Software's New Subscription Pricing Model Broadens Reach For Best Of Breed ITIL Tool."

Does your company provide or use an SaaS solution? If so, do you feel that the pricing models are fair? Do they make it worth the investment vs. purchasing new in-house systems? For providers, how are you modifying your pricing structure in the current economy?

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Holiday Pricing Search Engine

Move over Google spider - there is a new spider in town., a search bot that scans retail sites online for consumer price comparison, in expanding and advertising its benefits to consumers this holiday season:
The advantage of is its active search engine technology that continuously scans for pricing and product information. Holiday shoppers can utilize the Gift Guide to find the perfect present for the gadget-minded on their list. Shoppers can also create and share lists with their friends and family to peek into their wish lists. Additionally, the tool can be used to access the lists of the gadget savvy to help make the best gift-giving decision.

Read the full article: " Helps Consumers This Holiday Shopping Season"

How will pricing professionals in the retail industries be affected by this spider (if at all)? How will pricing strategies adjust? As always, we welcome feedback from pricers!